U.S. stocks performed poorly in 2018, and while the market has so far registered a double-digit gain in 2019, the S&P 500 Index is up just 3% over the past 12 months. This does not mean that all stocks are moving sideways. High-quality growth stocks continue to reward shareholders with strong returns.
Infosys Ltd. (INFY) stock has increased more than 12% year-to-date, and 17% in the past 12 months.
Infosys stock also rewards shareholders with dividends and share buybacks. As the company is experiencing accelerating growth across a number of its services, there could be room for the gains to continue. This could make Infosys an attractive dividend-paying tech stock.
Business Overview and Recent Results
Infosys Ltd. Is a global information technology corporation that provides services through a number of subsidiaries. The company’s solutions include consulting, software development, engineering, systems integration, and banking software services. Strategic areas of focus include artificial intelligence and digital capabilities. Infosys is headquartered in India, and employs more than 175,000 people. The company has a market capitalization of about $46 billion.
Infosys reported its third-quarter (fiscal 2019) results on Jan. 11. It posted quarterly revenue of $2.99 billion, an 8% increase from the same quarter a year earlier. On a constant currency basis, Infosys was able to grow its organic revenue by an even better 10% year over year. Revenue growth was primarily driven by a strong performance of Infosys’ digital revenues, which rose 33% compared to the same quarter the previous year.
With that said, Infosys was not able to translate the solid revenue growth rate into compelling earnings growth. Infosys’ operating earnings rose by just 1% year over year to $675 million. At the same time, earnings per share did not grow at all, actually declining 34% year over year, as EPS totaled just $0.12 during the December quarter.
Infosys guides for revenue growth of 8.5%-9% in fiscal 2019 in constant currencies. Reported revenue growth will likely be slightly lower than that. Infosys continues to expect an operating margin of 22%-24%.
Laying the Groundwork for Future Growth
Infosys has a positive long-term growth outlook. The company is developing next- generation technology services in categories that are seeing high growth. These markets are expected to grow at a high rate over the next several years. It reported 33% digital revenue growth last quarter, and since its digital business is still just 31.5% of total revenue, there is plenty of room for continued growth.
The company racked up over $1.5 billion of large-deal signings last quarter, indicating strong future demand. Overall, Infosys projects the addressable market of client digital services to be $160 billion to $200 billion. This underscores the huge demand for digital services such as AI, analytics, Big data, cyber security, the Internet of Things, and many more.
Infosys has a long history of growth. From 2003 to 2018, Infosys grew revenue by 19.5% per year, on average. This has translated into prodigious cash flow. It generated operating cash flow and free cash flow of $2.25 billion and $1.94 billion, respectively, in fiscal 2018. Such a high rate of cash flow allows the company to generously return cash to shareholders. It does this through a combination of dividends and share repurchases.
Dividend Analysis
Infosys intends to return up to 70% of its annual free cash flow to shareholders, through some combination of regular dividends, special dividends, and/or share repurchases. After reporting its most recent quarterly results, the company announced a new share repurchase program of roughly $1.2 billion, and declared a special dividend payment of $0.06 per share. The stock’s current yield is around 3%.
Infosys’ dividend looks very safe, due to a payout ratio that is not overly high. The dividend safety is supplemented by the company’s durable competitive advantages. The company competes with several peers, but due to the fact that the overall market for the services that Infosys offers continues to grow, competition is not a threat.
Infosys should also continue to pay its dividend, even in a recession. It remained profitable during the Great Recession, and it is quite likely that Infosys will remain profitable during future recessions as well.
Final Thoughts
The digital revolution has propelled huge growth across the technology industry. Infosys is at the center of many emerging growth areas of technology. The company is back to reporting strong revenue and earnings growth, and management is optimistic that growth can accelerate going forward.
Infosys rewards investors with steady dividends, and the stock could continue to rise in price as well. Earnings growth should continue in 2019 and beyond. The stock appears reasonably valued, trading at roughly 18 times forward EPS expectations for the company. This is a reasonable valuation multiple for a profitable company with positive EPS growth.
